Knowing the key terms, who your competitors are and having solid customer acquisition and intellectual property plans are key to ensuring your investment round is as successful and stress-free as possible, says investment lawyer Joel Cox.
Cox, a senior associate at DLA Piper, is a mentor at the AngelCube accelerator program and spoke at co-working space Inspire9 last night about the key legal issues that can confuse start-up founders in investment contracts.
Cox told StartupSmart preparation was vital for successful investment rounds.
“Knowing the process and what’s standard is really important for early stage companies,” Cox says. “You need a constitution, employee agreements, and any intellectual agreements to assign all rights to you. Get these ready to go. The rest you can do on the fly, lean with limited funds.”
According to Cox, one of the most misunderstood clauses for Australian founders are anti-dilution clauses.
“Anti-dilution provisions, often known as ratchets aren’t standard in Australia at all, and isn’t even standard in the US, but it’s sometimes used by investors in term sheets and not understood by start-ups,” Cox says.
“It means investors can convert at a lower fundraising price if the value goes down in the future. Normally founders prefer for everyone to bare the risk equally, so these are worth understanding.”
As the investment scene is develops in Australia, Cox says it’s likely the contracts will become more standardised. He adds many founders he’s worked with are expected to supply their own term sheet for angel rounds.
Prior to beginning to raise, Cox says start-ups can make their job easier by making sure they have clear plans around the variable factors that influence investment negotiations.
“Investors are really focused on finding founders who know the competitive landscape in great detail, and have a customer acquisition plan built into their business plan which appreciates how expensive that can be,” Cox says.
He adds a major legal hurdle for start-ups is intellectual property, which becomes increasingly important with each fundraising round.
“You don’t necessarily need it registered, but you need to know what you’ve got. I find a lot of start-up companies are looking at processes in intricate detail, closer than they’ve ever been explored before. Founders may not realise it, but there may be something that refined knowledge that they can develop and protect. That IP becomes really, really valuable at the series A round raising,” Cox says.
Cox adds many founders worry about their investment round moving slowly, but a standard investment process, from first meeting to actually receiving the money, can take up to 12 months.